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INVESTMENTS
 6 Months Ended
Jun. 30, 2013
INVESTMENTS  
INVESTMENTS

6. INVESTMENTS

 

 

Securities Available for Sale

 

The following table presents the amortized cost or cost and fair value of our available for sale securities:

 

   
(in millions)
   Amortized
Cost or
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
   Other-Than-
Temporary
Impairments
in AOCI(a)
  
   

June 30, 2013

                                

Bonds available for sale:

                                

U.S. government and government sponsored entities

   $ 3,346   $ 219   $ (35 ) $ 3,530   $ –  

Obligations of states, municipalities and political subdivisions

     31,481     1,565     (318 )   32,728     2  

Non-U.S. governments

     22,885     1,041     (297 )   23,629     –  

Corporate debt

     137,184     9,285     (2,512 )   143,957     82  

Mortgage-backed, asset-backed and collateralized:

                                

RMBS

     34,199     3,228     (445 )   36,982     1,618  

CMBS

     10,437     591     (347 )   10,681     43  

CDO/ABS

     9,162     702     (142 )   9,722     81
   

Total mortgage-backed, asset-backed and collateralized

     53,798     4,521     (934 )   57,385     1,742
   

Total bonds available for sale(b)

     248,694     16,631     (4,096 )   261,229     1,826
   

Equity securities available for sale:

                                

Common stock

     1,356     1,561     (24 )   2,893     –  

Preferred stock

     55     26     –     81     –  

Mutual funds

     179     11     (11 )   179     –
   

Total equity securities available for sale

     1,590     1,598     (35 )   3,153     –
   

Total

   $ 250,284   $ 18,229   $ (4,131 ) $ 264,382   $ 1,826
   

December 31, 2012

                                

Bonds available for sale:

                                

U.S. government and government sponsored entities

   $ 3,161   $ 323   $ (1 ) $ 3,483   $ –  

Obligations of states, municipalities and political subdivisions

     33,042     2,685     (22 )   35,705     2  

Non-U.S. governments

     25,449     1,395     (44 )   26,800     –  

Corporate debt

     135,728     15,848     (464 )   151,112     115  

Mortgage-backed, asset-backed and collateralized:

                                

RMBS

     31,330     3,379     (317 )   34,392     1,330  

CMBS

     9,449     770     (304 )   9,915     (79 )

CDO/ABS

     7,990     806     (244 )   8,552     82
   

Total mortgage-backed, asset-backed and collateralized

     48,769     4,955     (865 )   52,859     1,333
   

Total bonds available for sale(b)

     246,149     25,206     (1,396 )   269,959     1,450
   

Equity securities available for sale:

                                

Common stock

     1,492     1,574     (37 )   3,029     –  

Preferred stock

     55     23     –     78     –  

Mutual funds

     93     12     –     105     –
   

Total equity securities available for sale

     1,640     1,609     (37 )   3,212     –
   

Total

   $ 247,789   $ 26,815   $ (1,433 ) $ 273,171   $ 1,450
   

(a)  Represents the amount of other-than-temporary impairments recognized in Accumulated other comprehensive income. Amount includes unrealized gains and losses on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date.

(b)  At June 30, 2013 and December 31, 2012, bonds available for sale held by us that were below investment grade or not rated totaled $31.0 billion and $29.6 billion, respectively.

Securities Available for Sale in a Loss Position

 

The following table summarizes the fair value and gross unrealized losses on our available for sale securities in a loss position, aggregated by major investment category and length of time that individual securities have been in a continuous unrealized loss position:

 

   
 
   Less than 12 Months   12 Months or More   Total  
(in millions)
   Fair
Value
   Gross
Unrealized
Losses
   Fair
Value
   Gross
Unrealized
Losses
   Fair
Value
   Gross
Unrealized
Losses
  
   

June 30, 2013

                                      

Bonds available for sale:

                                      

U.S. government and government sponsored entities

   $ 889   $ 33   $ 10   $ 2   $ 899   $ 35  

Obligations of states, municipalities and political subdivisions

     4,623     298     88     20     4,711     318  

Non-U.S. governments

     3,995     273     159     24     4,154     297  

Corporate debt

     34,380     2,274     2,247     238     36,627     2,512  

RMBS

     7,164     272     1,048     173     8,212     445  

CMBS

     2,517     209     1,106     138     3,623     347  

CDO/ABS

     1,691     35     1,038     107     2,729     142
   

Total bonds available for sale

     55,259     3,394     5,696     702     60,955     4,096
   

Equity securities available for sale:

                                      

Common stock

     116     22     7     2     123     24  

Preferred stock

     5     –     –     –     5     –  

Mutual funds

     132     11     –     –     132     11
   

Total equity securities available for sale

     253     33     7     2     260     35
   

Total

   $ 55,512   $ 3,427   $ 5,703   $ 704   $ 61,215   $ 4,131
   

December 31, 2012

                                      

Bonds available for sale:

                                      

U.S. government and government sponsored entities

   $ 153   $ 1   $ –   $ –   $ 153   $ 1  

Obligations of states, municipalities and political

                                      

subdivisions

     692     11     114     11     806     22  

Non-U.S. governments

     1,555     19     442     25     1,997     44  

Corporate debt

     8,483     201     3,229     263     11,712     464  

RMBS

     597     28     1,661     289     2,258     317  

CMBS

     404     8     1,481     296     1,885     304  

CDO/ABS

     393     3     1,624     241     2,017     244
   

Total bonds available for sale

     12,277     271     8,551     1,125     20,828     1,396
   

Equity securities available for sale:

                                      

Common stock

     247     36     18     1     265     37  

Mutual funds

     3     –     –     –     3     –
   

Total equity securities available for sale

     250     36     18     1     268     37
   

Total

   $ 12,527   $ 307   $ 8,569   $ 1,126   $ 21,096   $ 1,433
   

At June 30, 2013, we held 6,313 and 125 individual fixed maturity and equity securities, respectively, that were in an unrealized loss position, of which 713 individual fixed maturity securities were in a continuous unrealized loss position for longer than 12 months. We did not recognize the unrealized losses in earnings on these fixed maturity securities at June 30, 2013 because we neither intend to sell the securities nor do we believe that it is more likely than not that we will be required to sell these securities before recovery of their amortized cost basis. Furthermore, we expect to recover the entire amortized cost basis of these securities. In performing this evaluation, we considered the recovery periods for securities in previous periods of broad market declines. For fixed maturity securities with significant declines, we performed fundamental credit analyses on a security-by-security basis, which included consideration of credit enhancements, expected defaults on underlying collateral, review of relevant industry analyst reports and forecasts and other available market data.

Contractual Maturities of Securities Available for Sale

 

The following table presents the amortized cost and fair value of fixed maturity securities available for sale by contractual maturity:

 

   
 
   Total Fixed Maturity Securities
Available for Sale		   Fixed Maturity Securities
in a Loss Position
Available for Sale		  
June 30, 2013
(in millions)
  
  Amortized Cost
   Fair Value
   Amortized Cost
   Fair Value
  
   

Due in one year or less

   $ 10,378   $ 10,572   $ 526   $ 512  

Due after one year through five years

     51,826     54,692     7,290     7,112  

Due after five years through ten years

     70,605     73,791     18,414     17,515  

Due after ten years

     62,087     64,789     23,323     21,252  

Mortgage-backed, asset-backed and collateralized

     53,798     57,385     15,498     14,564
   

Total

   $ 248,694   $ 261,229   $ 65,051   $ 60,955
   

Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay certain obligations with or without call or prepayment penalties.

The following table presents the gross realized gains and gross realized losses from sales or redemptions of our available for sale securities:

 

 
  


   
    
  


   
    
  
   
 
   Three Months Ended June 30,   Six Months Ended June 30,  
 
   2013   2012   2013   2012  
(in millions)
  

Gross
Realized
Gains

  

Gross
Realized
Losses

   Gross
Realized
Gains
   Gross
Realized
Losses
  

Gross
Realized
Gains

  

Gross
Realized
Losses

   Gross
Realized
Gains
   Gross
Realized
Losses
  
   

Fixed maturity securities

  
$
1,329
 
$
56
$ 875   $ 23  
$
1,700
 
$
127
$ 1,365   $ 39  

Equity securities

  
 
46
 
 
6
  14     1  
 
83
 
 
9
  465     4
   

Total

  
$
1,375
 
$
62
$ 889   $ 24  
$
1,783
 
$
136
$ 1,830   $ 43
   

For the three- and six-month periods ended June 30, 2013, the aggregate fair value of available for sale securities sold was $12.2 billion and $19.2 billion, respectively, which resulted in net realized capital gains of $1.3 billion and $1.6 billion, respectively.

For the three- and six-month periods ended June 30, 2012, the aggregate fair value of available for sale securities sold was $10.6 billion and $21.5 billion, respectively, which resulted in net realized capital gains of $0.9 billion and $1.8 billion, respectively.

 

Trading Securities

 

The following table presents the fair value of our trading securities:

 

   
 
   June 30, 2013   December 31, 2012  
(in millions)
  

Fair
Value

  

Percent
of Total

   Fair
Value
   Percent
of Total
  
   

Fixed maturity securities:

  
 
 
 
 
 
 
            

U.S. government and government sponsored entities

  
$
6,061
 
 
25
%
 $ 6,794     27 %

Obligations of states, territories and political subdivisions

  
 
181
 
 
1
 
   –     –  

Non-U.S. governments

  
 
2
 
 
–
 
   2     –  

Corporate debt

  
 
1,098
 
 
4
 
   1,320     5  

Mortgage-backed, asset-backed and collateralized:

  
 
 
 
 
 
 
            

RMBS

  
 
2,186
 
 
9
 
   1,727     7  

CMBS

  
 
1,701
 
 
7
 
   2,227     9  

CDO/ABS and other collateralized(a)

  
 
12,553
 
 
51
 
   12,506     50
   

Total mortgage-backed, asset-backed and collateralized

  
 
16,440
 
 
67
 
   16,460     66  

Other

  
 
7
 
 
–
 
   8     –
   

Total fixed maturity securities

  
 
23,789
 
 
97
 
   24,584     98
   

Equity securities

  
 
758
 
 
3
 
   662     2
   

Total(b)

  
$
24,547
 
 
100
%
 $ 25,246     100 %
   

(a)  Includes $0.8 billion of U.S. Government agency backed ABS.

(b)  Securities presented herein are measured at fair value based on our election of the fair value option.

 

Net Investment Income

 

The following table presents the components of Net investment income:

 

 
  


   
  


   
  
   
 
   Three Months Ended
June 30,		   Six Months Ended
June 30,		  
(in millions)
  

2013

   2012
  

2013

   2012
  
   

Fixed maturity securities, including short-term investments

  
$
2,919
 
 $ 3,180  
$
5,964
 
 $ 6,284  

Change in fair value of ML II

  
 
–
 
   –  
 
–
 
   246  

Change in fair value of ML III

  
 
–
 
   1,306  
 
–
 
   2,558  

Change in fair value of AIA securities including realized gain

  
 
–
 
   (493 )
 
–
 
   1,302  

Equity securities

  
 
(12
)
   21  
 
25
 
   32  

Interest on mortgage and other loans

  
 
290
 
   264  
 
570
 
   529  

Alternative investments*

  
 
738
 
   350  
 
1,604
 
   855  

Real estate

  
 
36
 
   32  
 
67
 
   58  

Other investments

  
 
28
 
   (22 )
 
81
 
   1
   

Total investment income

  
 
3,999
 
   4,638  
 
8,311
 
   11,865  

Investment expenses

  
 
155
 
   157  
 
303
 
   279
   

Net investment income

  
$
3,844
 
 $ 4,481  
$
8,008
 
 $ 11,586
   

*     Includes hedge funds, private equity funds, affordable housing partnerships and other investment partnerships.

 

Net Realized Capital Gains and Losses

 

The following table presents the components of Net realized capital gains (losses):

 

 
  


   
  


   
  
   
 
   Three Months Ended
June 30,		   Six Months Ended
June 30,		  
(in millions)
  

2013

   2012
  

2013

   2012
  
   

Sales of fixed maturity securities

  
$
1,273
 
 $ 852  
$
1,573
 
 $ 1,326  

Sales of equity securities

  
 
40
 
   13  
 
74
 
   461  

Other-than-temporary impairments:

  
 
 
 
      
 
 
 
      

Severity

  
 
(3
)
   (10 )
 
(5
)
   (14 )

Change in intent

  
 
–
 
   (2 )
 
(3
)
   (22 )

Foreign currency declines

  
 
–
 
   (1 )
 
–
 
   (6 )

Issuer-specific credit events

  
 
(82
)
   (202 )
 
(145
)
   (788 )

Adverse projected cash flows

  
 
(1
)
   (1 )
 
(7
)
   (4 )

Provision for loan losses

  
 
(2
)
   24  
 
(5
)
   26  

Foreign exchange transactions

  
 
82
 
   185  
 
411
 
   (47 )

Derivative instruments

  
 
288
 
   (397 )
 
17
 
   (659 )

Other

  
 
(4
)
   (62 )
 
(19
)
   (125 )
   

Net realized capital gains

  
$
1,591
 
 $ 399  
$
1,891
 
 $ 148
   

 

Change in Unrealized Appreciation of Investments

 

The following table presents the increase (decrease) in unrealized appreciation of our available for sale securities:

 

 
  


   
  


   
  
   
 
   Three Months Ended
June 30,		   Six Months Ended
June 30,		  
(in millions)
  

2013

   2012
  

2013

   2012
  
   

Increase (decrease) in unrealized appreciation of investments:

  
 
 
 
      
 
 
 
      

Fixed maturities

  
$
(10,123
)
 $ 2,026  
$
(11,275
)
 $ 5,013  

Equity securities

  
 
(16
)
   (30 )
 
(9
)
   (590 )

Other investments

  
 
55
 
   84  
 
7
 
   368
   

Total Increase (decrease) in unrealized appreciation of investments

  
$
(10,084
)
 $ 2,080  
$
(11,277
)
 $ 4,791
   

 

Evaluating Investments for Other-Than-Temporary Impairments

 

For a discussion of our policy for evaluating investments for other-than-temporary impairments, see Note 7 to the Consolidated Financial Statements in the 2012 Annual Report.

Credit Impairments

 

The following table presents a rollforward of the cumulative credit loss component of other-than-temporary impairments recognized in earnings for our available for sale fixed maturity securities, and includes structured, corporate, municipal and sovereign fixed maturity securities:

 

 
  


   
  


   
  
   
 
   Three Months Ended
June 30,		   Six Months Ended
June 30,		  
(in millions)
  

2013

   2012
  

2013

   2012
  
   

Balance, beginning of period

  
$
4,603
 
 $ 6,464  
$
5,164
 
 $ 6,504  

Increases due to:

  
 
 
 
      
 
 
 
      

Credit impairments on new securities subject to impairment losses

  
 
10
 
   35  
 
27
 
   172  

Additional credit impairments on previously impaired securities

  
 
12
 
   69  
 
30
 
   376  

Reductions due to:

  
 
 
 
      
 
 
 
      

Credit impaired securities fully disposed for which there was no prior intent or requirement to sell

  
 
(167
)
   (248 )
 
(558
)
   (518 )

Accretion on securities previously impaired due to credit*

  
 
(222
)
   (231 )
 
(427
)
   (453 )

Other

  
 
–
 
   1  
 
–
 
   9
   

Balance, end of period

  
$
4,236
 
 $ 6,090  
$
4,236
 
 $ 6,090
   

*     Represents both accretion recognized due to changes in cash flows expected to be collected over the remaining expected term of the credit impaired securities and the accretion due to the passage of time.

Purchased Credit Impaired (PCI) Securities

 

Since 2011, we have purchased certain RMBS securities that have experienced deterioration in credit quality since their issuance. We determined, based on our expectations as to the timing and amount of cash flows expected to be received, that it was probable at the date of acquisition that we would not collect all contractually required payments for these PCI securities, including both principal and interest after considering the effects of prepayments. At acquisition, the timing and amount of the undiscounted future cash flows expected to be received on each PCI security was determined based on our best estimate using key assumptions, such as interest rates, default rates and prepayment speeds. At acquisition, the difference between the undiscounted expected future cash flows of the PCI securities and the recorded investment in the securities represents the initial accretable yield, which is to be accreted into net investment income over their remaining lives on a level-yield basis. Additionally, the difference between the contractually required payments on the PCI securities and the undiscounted expected future cash flows represents the non-accretable difference at acquisition. The accretable yield and the non-accretable difference will change over time, based on actual payments received and changes in estimates of undiscounted expected future cash flows, which are discussed further below.

On a quarterly basis, the undiscounted expected future cash flows associated with PCI securities are re-evaluated based on updates to key assumptions. Declines in undiscounted expected future cash flows due to further credit deterioration as well as changes in the expected timing of the cash flows can result in the recognition of an other-than-temporary impairment charge, as PCI securities are subject to our policy for evaluating investments for other-than-temporary impairment. Changes to undiscounted expected future cash flows due solely to the changes in the contractual benchmark interest rates on variable rate PCI securities will change the accretable yield prospectively. Significant increases in undiscounted expected future cash flows for reasons other than interest rate changes are recognized prospectively as adjustments to the accretable yield.

The following tables present information on our PCI securities, which are included in bonds available for sale:

 

   
(in millions)
   At Date of Acquisition
  
   

Contractually required payments (principal and interest)

   $ 23,138  

Cash flows expected to be collected*

     18,213  

Recorded investment in acquired securities

     11,920
   

*     Represents undiscounted expected cash flows, including both principal and interest.

 

 
  


   
  
   
(in millions)
  

June 30, 2013

   December 31, 2012
  
   

Outstanding principal balance

  
$
14,266
$ 11,791  

Amortized cost

  
 
9,676
  7,718  

Fair value

  
 
10,801
  8,823
   

The following table presents activity for the accretable yield on PCI securities:

 

 
  


   
  


   
  
   
 
   Three Months Ended
June 30,		   Six Months Ended
June 30,		  
(in millions)
  

2013

   2012
  

2013

   2012
  
   

Balance, beginning of period

  
$
5,114
 
 $ 5,146  
$
4,766
 
 $ 4,135  

Newly purchased PCI securities

  
 
761
 
   196  
 
1,106
 
   1,418  

Disposals

  
 
–
 
   (121 )
 
(60
)
   (168 )

Accretion

  
 
(170
)
   (177 )
 
(330
)
   (345 )

Effect of changes in interest rate indices

  
 
22
 
   (133 )
 
106
 
   (161 )

Net reclassification from non-accretable difference, including effects of prepayments

  
 
174
 
   39  
 
313
 
   71
   

Balance, end of period

  
$
5,901
 
 $ 4,950  
$
5,901
 
 $ 4,950
   

 

Pledged Investments

 

Secured Financing and Similar Arrangements

 

We enter into financing transactions whereby certain securities are transferred to financial institutions in exchange for cash or other liquid collateral. Securities transferred by us under these financing transactions may be sold or repledged by the counterparties. As collateral for the securities transferred by us, counterparties transfer assets to us, such as cash or high quality fixed maturity securities. Collateral levels are monitored daily and are generally maintained at an agreed-upon percentage of the fair value of the transferred securities during the life of the transactions. Where we receive fixed maturity securities as collateral, we do not have the right to sell or repledge the collateral unless an event of default occurs by the counterparties. At the termination of the transactions, we and our counterparties are obligated to return the collateral provided and the securities transferred, respectively. We treat these transactions as secured financing arrangements.

Secured financing transactions also include securities sold under agreements to repurchase (repurchase agreements), in which we transfer securities in exchange for cash, with an agreement by us to repurchase the same or substantially similar securities. In the majority of these repurchase agreements, the securities transferred by us may be sold or repledged by the counterparties. Repurchase agreements entered into by our Direct Investment book (DIB) are carried at fair value based on market-observable interest rates. All other repurchase agreements are recorded at their contracted repurchase amounts plus accrued interest.

The following table presents the fair value of securities pledged to counterparties under secured financing transactions:

 

 
  


   
  
   
(in millions)
  

June 30, 2013

   December 31, 2012
  
   

Securities available for sale

  
$
4,291
$ 8,180  

Trading securities

  
 
2,804
  2,985
   

We also enter into agreements in which we purchase securities under agreements to resell (reverse repurchase agreements), which are accounted for as secured financing transactions and reported as short-term investments or other assets, depending on their terms. These agreements are recorded at their contracted resale amounts plus accrued interest, other than those that are accounted for at fair value. Such agreements entered into by the DIB are carried at fair value based on market observable interest rates. In all reverse repurchase transactions, we take possession of or obtain a security interest in the related securities, and we have the right to sell or repledge the collateral received.

The following table presents information on the fair value of securities pledged to us under reverse repurchase agreements:

 

 
  


   
  
   
(in millions)
  

June 30, 2013

   December 31, 2012
  
   

Securities collateral pledged to us

  
$
8,548
$ 11,039  

Amount repledged by us

  
 
7
  33
   

Insurance — Statutory and Other Deposits

 

Total carrying values of cash and securities deposited by our insurance subsidiaries under requirements of regulatory authorities or other insurance-related arrangements, including certain annuity-related obligations and certain reinsurance treaties, were $6.9 billion and $8.9 billion at June 30, 2013 and December 31, 2012, respectively.

Other Pledges

 

Certain of our subsidiaries are members of Federal Home Loan Banks (FHLBs) and such membership requires the members to own stock in these FHLBs. We owned an aggregate of $64 million and $84 million of stock in FHLBs at June 30, 2013 and December 31, 2012, respectively. To the extent we borrow from the FHLB, our ownership interest in the stock of FHLBs will be pledged to the FHLB. In addition, we have pledged securities available for sale with a fair value of $75 million and $341 million at June 30, 2013 and December 31, 2012, respectively, associated with advances from the FHLBs.

Certain GIAs have provisions that require collateral to be posted or payments to be made by us upon a downgrade of our long-term debt ratings. The actual amount of collateral required to be posted to the counterparties in the event of such downgrades, and the aggregate amount of payments that we could be required to make, depend on market conditions, the fair value of outstanding affected transactions and other factors prevailing at and after the time of the downgrade. The fair value of securities pledged as collateral with respect to these obligations approximated $4.3 billion and $4.4 billion at June 30, 2013 and December 31, 2012, respectively. This collateral primarily consists of securities of the U.S. government and government sponsored entities and generally cannot be repledged or resold by the counterparties.